Private Label Profitability:Private Label Profitability:The Precipice Of An ExplosionThe Precipice Of An Explosion

Sunday, November 14, 1999Sunday, November 14, 1999

ChicagoChicago

8912 E. Pinnacle Peak Rd. Ste 650 Scottsdale, Arizona 85255 8912 E. Pinnacle Peak Rd. Ste 650 Scottsdale, Arizona 85255 Phone (480) 513-0547 • Fax (480) 513-0548 • E-Mail: chrishoyt@hoytnet.com Phone (480) 513-0547 • Fax (480) 513-0548 • E-Mail: chrishoyt@hoytnet.com

TodayToday

The gathering storm of Private Label energy in The gathering storm of Private Label energy in the United Statesthe United States

What is required to survive and thrive as a What is required to survive and thrive as a private label manufacturer or supplierprivate label manufacturer or supplier

Hoyt & Company:Hoyt & Company: Marketing and sales strategistsMarketing and sales strategists

Involved with Category Management from the start:Involved with Category Management from the start: Specialists in Category Management and trade promotion spendingSpecialists in Category Management and trade promotion spending

Over 100 projects with 30 of top 100 advertisers since 1985:Over 100 projects with 30 of top 100 advertisers since 1985: Annual category business plansAnnual category business plans Re-engineering organizations to function effectively in Category Re-engineering organizations to function effectively in Category

ManagementManagement All systems and processes relating to Category ManagementAll systems and processes relating to Category Management Restructuring trade promotion spending and tracking to support Restructuring trade promotion spending and tracking to support

Category Management strategies and implementation requirements Category Management strategies and implementation requirements and to maximize efficiencies of trade promotion spendingand to maximize efficiencies of trade promotion spending

Made every mistake humans can make.Made every mistake humans can make.

You are about to benefit from 12 years of trial and error.You are about to benefit from 12 years of trial and error.

The Gathering StormThe Gathering Storm

Hoyt & Company Believes That the Private Label Business in Hoyt & Company Believes That the Private Label Business in the United States Is on the Precipice of an Explosion:the United States Is on the Precipice of an Explosion:

Past growth cannot be used as a predictor of future Past growth cannot be used as a predictor of future potential.potential.

Consolidation and determination to increase profits Consolidation and determination to increase profits make it a whole new ball game.make it a whole new ball game.

Private Label suppliers face both huge threats and Private Label suppliers face both huge threats and huge opportunities.huge opportunities.

The U.K. provides an almost line-by-line benchmark The U.K. provides an almost line-by-line benchmark for what we believe will be the Private Label trajectory for what we believe will be the Private Label trajectory in the U.S. over the next 5-10 years.in the U.S. over the next 5-10 years.

The Most Distinguishing Factor of the U.K. Marketplace Over the The Most Distinguishing Factor of the U.K. Marketplace Over the Past 25 Years Has Been the Astounding Growth of Private Labels:Past 25 Years Has Been the Astounding Growth of Private Labels:

Between 1975 and 1998, Private Label unit share Between 1975 and 1998, Private Label unit share jumped from 25% to 43% of total U.K. packaged good jumped from 25% to 43% of total U.K. packaged good sales while dollar share jumped from 20% to 36%:sales while dollar share jumped from 20% to 36%:

Non-packaged goods private labels in the U.K. now Non-packaged goods private labels in the U.K. now account for over 80% of all goods sold in the meat, account for over 80% of all goods sold in the meat, fish, poultry, fruits, vegetables and deli fish, poultry, fruits, vegetables and deli departments.departments.

The Most Distinguishing Factor of the U.K. Marketplace Over the The Most Distinguishing Factor of the U.K. Marketplace Over the Past 25 Years Has Been the Astounding Growth of Private Labels:Past 25 Years Has Been the Astounding Growth of Private Labels:

It is clear that there is a consistent relationship It is clear that there is a consistent relationship between Private Label growth and retailer between Private Label growth and retailer consolidation:consolidation:

Top 5 Supermarket Chains, U.K. 1975 - 1998Top 5 Supermarket Chains, U.K. 1975 - 1998

19751975 19981998 % +/-% +/-

Top 5 SOMTop 5 SOM

Private LabelsPrivate Labels

22%22%

24%24%

63%63%

43%43%

18651865

79%79%

Source: PLMA, Tony Cowling, Taylor Nelson, Mark Husson

Key Private Label Drivers – U.K., 1975 - 1998:Key Private Label Drivers – U.K., 1975 - 1998:

1.1. 1970’s & 1980’s – Sainsbury Private Label Objectives:1970’s & 1980’s – Sainsbury Private Label Objectives: Give Sainsbury name status of a major brandGive Sainsbury name status of a major brand Offer own labels competitive on quality to major national Offer own labels competitive on quality to major national

brands at consistently lower pricesbrands at consistently lower prices Use national brands to promote categories and add Use national brands to promote categories and add

excitement (i.e., build traffic)excitement (i.e., build traffic)

2.2. Late 1980’s, Early 1990’s – Enter The Mass Merchandisers:Late 1980’s, Early 1990’s – Enter The Mass Merchandisers:

QwikSave – Built business on price and cheap P.L.sQwikSave – Built business on price and cheap P.L.s Discount share of market catapulted from 9% - 15% between Discount share of market catapulted from 9% - 15% between

1989 and 19921989 and 1992 Supermarkets responded with own cheap P.L.s – e.g., Tesco Supermarkets responded with own cheap P.L.s – e.g., Tesco

with BOLwith BOL

U.K. 1975 - 1998 (cont’d):U.K. 1975 - 1998 (cont’d):

3.3. Since 1992:Since 1992:

1992 – Analysts concerned about impact of low price brands 1992 – Analysts concerned about impact of low price brands on retailer profitson retailer profits

Sainsbury introduces first successful premium private label Sainsbury introduces first successful premium private label with Novon in the highly competitive HDLD category:with Novon in the highly competitive HDLD category: Between 1992 and 1996, private label share of HDLD Between 1992 and 1996, private label share of HDLD

catapulted from 8-16%catapulted from 8-16% Sainsbury Novon share doubled from 15-33%Sainsbury Novon share doubled from 15-33% Lever’s share of HDLD nose-dived from 40-30%Lever’s share of HDLD nose-dived from 40-30%

Sainsbury immediately followed with Classic Cola which Sainsbury immediately followed with Classic Cola which chopped Coke and Pepsi share in Sainsbury stores fromchopped Coke and Pepsi share in Sainsbury stores from 85% - 40% in 85% - 40% in less than one yearless than one year

U.K. 1975 - 1998 (cont’d):U.K. 1975 - 1998 (cont’d):

3.3. Since 1992, cont’dSince 1992, cont’d

Tesco retaliated with Virgin Cola (controlled label) which at Tesco retaliated with Virgin Cola (controlled label) which at one time captured 25% of Tesco’s CSD salesone time captured 25% of Tesco’s CSD sales

Virgin is now being phased out by Tesco in favor of Virgin is now being phased out by Tesco in favor of Tesco’s own labelTesco’s own label

Net On U.K.:Net On U.K.:

Over 43¢ of every dollar spent in U.K. supermarkets is now Over 43¢ of every dollar spent in U.K. supermarkets is now spent on private labels.spent on private labels.

U.K. private label brand marketing has all of the U.K. private label brand marketing has all of the sophistication as national brand marketing in the United sophistication as national brand marketing in the United States:States:

““Store Brands” – Premium P.L.s priced to compete with Store Brands” – Premium P.L.s priced to compete with nationals and deliver sufficient profits to fund nationals and deliver sufficient profits to fund advertising and promotion campaigns.advertising and promotion campaigns.

““Traditional P.L.s” – NBE’s to capture conventional Traditional P.L.s” – NBE’s to capture conventional private label consumers and offer high value for price.private label consumers and offer high value for price.

““Cheap Budget Own Labels” – Minimum acceptable Cheap Budget Own Labels” – Minimum acceptable performance, packaging and priced accordingly.performance, packaging and priced accordingly.

Net On U.K. (cont’d):Net On U.K. (cont’d):

U.K. private labels now growing at a steady 1% per year U.K. private labels now growing at a steady 1% per year while national brands continue to decline, in some while national brands continue to decline, in some categories as much as 2-3% per year.categories as much as 2-3% per year.

Supermarkets are now the second largest advertisers in Supermarkets are now the second largest advertisers in the country, behind only automobiles:the country, behind only automobiles:

Tesco, Sainsbury and Asda are each individually Tesco, Sainsbury and Asda are each individually among the top 10 advertisers in the realm.among the top 10 advertisers in the realm.

The amount of exposure the U.K. consumer has to retail The amount of exposure the U.K. consumer has to retail organizations in the U.K. is overwhelming compared to that organizations in the U.K. is overwhelming compared to that of major branded suppliers.of major branded suppliers.

Net On U.K. (cont’d):Net On U.K. (cont’d):

In many categories, the demarcation between national In many categories, the demarcation between national brands and store brands has been so diluted that the brands and store brands has been so diluted that the consumer no longer distinguishes between the two, much consumer no longer distinguishes between the two, much less cares.less cares.

The “balance of power” struggle in the U.K. is over. U.K. The “balance of power” struggle in the U.K. is over. U.K. retailers:retailers:

Control the shelvesControl the shelves Control the windowsControl the windows Control the “telly”Control the “telly” Control the distributionControl the distribution

Counter Arguments – “It Will Never Happen Counter Arguments – “It Will Never Happen Here – The U.S. Is Different!”Here – The U.S. Is Different!”

The U.K. is small geographically vs. the U.S. which is very The U.K. is small geographically vs. the U.S. which is very heterogeneous and regionalized in nature.heterogeneous and regionalized in nature.

The U.S. consumer is habituated to national brands and has The U.S. consumer is habituated to national brands and has more disposable income than the U.K. consumer.more disposable income than the U.K. consumer.

Advertising costs too much in the U.S. and retailers would never Advertising costs too much in the U.S. and retailers would never be able to afford the sustained advertising necessary to be able to afford the sustained advertising necessary to establish a store brand as a national. establish a store brand as a national.

Meanwhile, U.S. national brand manufacturers are much more Meanwhile, U.S. national brand manufacturers are much more powerful than in the U.K. and are not just going to sit idly by powerful than in the U.K. and are not just going to sit idly by while supermarkets and other retailers chip away at their while supermarkets and other retailers chip away at their franchises or shares.franchises or shares.

All This May Have Been True In The Past All This May Have Been True In The Past BUT...BUT...

While Hoyt & Company does not wish to degrade or While Hoyt & Company does not wish to degrade or minimize these arguments, we believe that there is minimize these arguments, we believe that there is presently a combination of factors at work in this presently a combination of factors at work in this

country which will shortly and inevitably bring fierce country which will shortly and inevitably bring fierce and renewed retailer energy behind the private label and renewed retailer energy behind the private label sector – energy, power and commitment unlike any sector – energy, power and commitment unlike any

other country has experienced before.other country has experienced before.

While Hoyt & Company does not wish to degrade or While Hoyt & Company does not wish to degrade or minimize these arguments, we believe that there is minimize these arguments, we believe that there is presently a combination of factors at work in this presently a combination of factors at work in this

country which will shortly and inevitably bring fierce country which will shortly and inevitably bring fierce and renewed retailer energy behind the private label and renewed retailer energy behind the private label sector – energy, power and commitment unlike any sector – energy, power and commitment unlike any

other country has experienced before.other country has experienced before.

Factor #1 – Consolidation:Factor #1 – Consolidation:

Top 5 Industry Players – FoodTop 5 Industry Players – Food

YearYear % ACV% ACV

19921992

19981998

19991999

2002E2002E

2007E2007E

19%19%

24%24%

33%33%

50%50%

60%60%

Private Label Share Data In Other Countries Show That With Few Private Label Share Data In Other Countries Show That With Few Exceptions, It Is The Large, Powerful Retailers Who Invest Most In Their Exceptions, It Is The Large, Powerful Retailers Who Invest Most In Their P.L. Programs And Who Almost Uniformly Have The Highest P.L. Shares:P.L. Programs And Who Almost Uniformly Have The Highest P.L. Shares:

CountryCountry Top RetailerTop RetailerTop RetailerTop Retailer P.L. Share ($)P.L. Share ($)

Avg. Avg. P.L. ShareP.L. Share % Difference% Difference

U.K.U.K.

CanadaCanada

NetherlandsNetherlands

U.S.U.S.

FranceFrance

BelgiumBelgium

SpainSpain

TescoTesco

LoblawLoblaw

AholdAhold

KrogerKroger

CarrefourCarrefour

DelhaizeDelhaize

ContinentéContinenté

45.045.0

37.037.0

33.033.0

24.524.5

20.020.0

20.020.0

20.020.0

37.137.1

20.020.0

16.316.3

16.316.3

20.520.5

16.316.3

12.012.0

+21%+21%

+85%+85%

+127%+127%

+50%+50%

-3%-3%

+23%+23%

+66%+66%

Source: Mark Husson, Merrill Lynch, 1999

Factor #2 – Private Label Profitability:Factor #2 – Private Label Profitability:

Private Label gross margins are estimated at 34% vs. Private Label gross margins are estimated at 34% vs. national brands at 24%.national brands at 24%.

The narcotic appeal of P.L. margins is shown in the The narcotic appeal of P.L. margins is shown in the following table which illustrates P.L. profit contribution in following table which illustrates P.L. profit contribution in the CLCP category for one major national retailer.the CLCP category for one major national retailer.

Factor #2 – Private Label Profitability:Factor #2 – Private Label Profitability:

Contact Lens Cleaning Products, 52 Weeks, 9/99Contact Lens Cleaning Products, 52 Weeks, 9/99

SegmentSegment Total ProfitTotal Profit P.L. ProfitP.L. Profit P.L. % TotalP.L. % Total Total Vol.Total Vol. P.L. VolP.L. Vol

Re-wettingRe-wetting

WeeklyWeekly

DailyDaily

MPSMPS

PeroxidePeroxide

HardHard

RGPRGP

Aerosol SalinesAerosol Salines

Liquid SalinesLiquid Salines

TOTALSTOTALS

$1,335.7$1,335.7

1,644.31,644.3

743.7743.7

2,501.52,501.5

38.938.9

1.91.9

1,103.91,103.9

61.461.4

193.6193.6

$7,625.0$7,625.0

$189.4$189.4

352.6352.6

10.910.9

1,778.31,778.3

––

––

––

––

––

$2,331.3$2,331.3

14%14%

21%21%

1%1%

71%71%

––

––

––

––

––

30.6%30.6% 5,156.95,156.9 6.1%6.1%

Factor #3 – Need For Differentiation On Factor #3 – Need For Differentiation On Basis Other Than Price:Basis Other Than Price:

60% ACV among five supermarkets will escalate competition to 60% ACV among five supermarkets will escalate competition to unprecedented heights:unprecedented heights:

Not two years ago, one often-quoted survey noted that over Not two years ago, one often-quoted survey noted that over 83% of consumers thought all supermarkets were alike.83% of consumers thought all supermarkets were alike.

Supermarkets cannot compete on price and raise profits at the Supermarkets cannot compete on price and raise profits at the same time.same time.

One of supermarkets’ key weapons will be premium Store One of supermarkets’ key weapons will be premium Store Brands:Brands:

Wal-Mart is already on this trackWal-Mart is already on this track Consolidation –> Increased Store Penetration –> makes Consolidation –> Increased Store Penetration –> makes

advertising cost-effectiveadvertising cost-effective 60% national penetration is magic number – reason why Wal-60% national penetration is magic number – reason why Wal-

Mart wants so desperately to get into the EastMart wants so desperately to get into the East

Consumer Migration Across Channels Only Intensifies Consumer Migration Across Channels Only Intensifies Competition And Exacerbates The Need To Differentiate:Competition And Exacerbates The Need To Differentiate:

1999:1999:

100% of consumers shop supermarkets 1.8 times per 100% of consumers shop supermarkets 1.8 times per week.week.

94% of consumers shop mass merchandisers 2.3 times per 94% of consumers shop mass merchandisers 2.3 times per month.month.

86% of consumers shop drug chains 1.3 times per month.86% of consumers shop drug chains 1.3 times per month.

52% of consumers shop convenience/gas 1.1 times per 52% of consumers shop convenience/gas 1.1 times per month.month.

49% of consumers shop clubs 9 times per year.49% of consumers shop clubs 9 times per year.

Source: A.C. Nielsen, Channel Blurring Study, 1999

Factor #4 – Rapidly Growing Population Factor #4 – Rapidly Growing Population Segments To Whom Private Labels Appeal:Segments To Whom Private Labels Appeal:

ElderlyElderly

Lower IncomesLower Incomes

Lower Housing ValuesLower Housing Values

Large FamiliesLarge Families

Higher % Working WomenHigher % Working Women

High Levels of EducationHigh Levels of Education

Source: Stephen J. Hoch & Sanjay K. Dhar, Wharton, Feb, 1996: “Why Store Brand Penetration Varies By Retailer”

Average HH Income – Despite What The Government Average HH Income – Despite What The Government Might Claim, Here Are The Startling And Abysmal Facts:Might Claim, Here Are The Startling And Abysmal Facts:

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

1967 1970 1975 1980 1985 1990 1995 1998

Lowest Quintile Second Quintile Third Quintile

Fourth Quintile Highest Quintile Median Income

Source: U.S. Census Bureau: 1967 - 1999

If The Average HH Bought P.L.s Exclusively On Every Shopping Trip To A If The Average HH Bought P.L.s Exclusively On Every Shopping Trip To A Supermarket, It Could Save Up To $3,000 Per Year, Depending On Where It Supermarket, It Could Save Up To $3,000 Per Year, Depending On Where It Lived:Lived:

P.L. Savings Vs. National Brands, 54 Item Shopping ListP.L. Savings Vs. National Brands, 54 Item Shopping List

Supermarket ChainSupermarket ChainBrand-NameBrand-Name

PricePriceStore-BrandStore-Brand

PricePrice Overall SavingsOverall Savings

A&PA&P

JewelJewel

SafewaySafeway

ShopRiteShopRite

$135.70$135.70

138.81138.81

139.33139.33

135.91135.91

$91.13$91.13

114.36114.36

114.71114.71

98.5698.56

$44.57$44.57

24.2524.25

24.6224.62

37.3537.35

Avg. of Above 4 Retailers:Avg. of Above 4 Retailers: $32.69$32.69

X 91 Trips/Year:X 91 Trips/Year: $2,975$2,975

Source: Phil Lempert, 1998: “Store Brands: Their Stock Is Soaring”

The Following Reiterates Why The Prospect Of Buying Private Labels To The Following Reiterates Why The Prospect Of Buying Private Labels To Save Up To $3K Per Year Is So Powerful For The Average American, Save Up To $3K Per Year Is So Powerful For The Average American, Particularly If He/She Felt They Could Get NBE (Or Better) In The Process:Particularly If He/She Felt They Could Get NBE (Or Better) In The Process:

Share of Aggregate HH Income By Quintile: 1996, 1993 and 1998 (%)Share of Aggregate HH Income By Quintile: 1996, 1993 and 1998 (%)

4.0

10.8

17.3

24.2

43.8

3.6

9.0

15.1

23.5

48.9

3.6

9.0

15.0

23.2

49.2

0

10

20

30

40

50

60

Lowest Quintile Second Quintile Third Quintile Fourth Quintile Highest Quintile

199619931998

Middle 60 Percent

17.521.0 24.4

Top 5Percent

Source: U.S. Census Bureau, Current Population Survey, March 1968, 1994, 1999

Factor #5 – Dilution and Erosion Of Supplier Factor #5 – Dilution and Erosion Of Supplier Clout And Control:Clout And Control:

With few exceptions, the national brand supplier community is in With few exceptions, the national brand supplier community is in disarray:disarray: Has not been able to formulate a successful response to retailer Has not been able to formulate a successful response to retailer

consolidation or ascendancyconsolidation or ascendancy Spending more and getting less (TP spending now at 60%)Spending more and getting less (TP spending now at 60%) Focused on the wrong things – e.g., growing the category Focused on the wrong things – e.g., growing the category

instead of own brands (!)instead of own brands (!) Characterized by unthinking and uncritical acceptance of Characterized by unthinking and uncritical acceptance of

industry epidemics such as DPP, ECR, “Partnering”, “Meal industry epidemics such as DPP, ECR, “Partnering”, “Meal Solutions”, “Solutions Selling” and Category Management.Solutions”, “Solutions Selling” and Category Management.

Meanwhile, brand loyalty continues to erode while P.L. sales Meanwhile, brand loyalty continues to erode while P.L. sales grow at national brands’ expense.grow at national brands’ expense.

This Is True Of P.L. vs. National Brands In This Is True Of P.L. vs. National Brands In All Trade Classes:All Trade Classes:

Food Sales: Private Label Versus National Brand Growth By FormatFood Sales: Private Label Versus National Brand Growth By Format

2.3%

1.0%

18.1%

3.2%

3.0%

7.1%

20.9%

3.5%

0.0% 5.0% 10.0% 15.0% 20.0% 25.0%

Private LabelNational Brands

Total

Mass Merchants

Drug Stores

Supermarkets

Source: Private Label Manufacturing Association

It Is Also True of Manufacturers Of All Sizes Except Small It Is Also True of Manufacturers Of All Sizes Except Small Manufacturers Who Either Did Not Know Enough Or Have The Manufacturers Who Either Did Not Know Enough Or Have The Resources To Get Distracted By The Latest Industry Craze:Resources To Get Distracted By The Latest Industry Craze:

Manufacturer Sales Growth By Channel Comparison (1998 over 1997)Manufacturer Sales Growth By Channel Comparison (1998 over 1997)

SupermarketsSupermarketsDrugDrug

StoresStoresMassMass

MerchandiserMerchandiserCombinedCombined

OutletsOutlets

Top 10 ManufacturersTop 10 Manufacturers

Next 15 ManufacturersNext 15 Manufacturers

All Other ManufacturersAll Other Manufacturers

Private LabelPrivate Label

1.2%1.2%

0.9%0.9%

3.5%3.5%

3.2%3.2%

4.7%4.7%

1.5%1.5%

2.1%2.1%

7.3%7.3%

14.5%14.5%

13.0%13.0%

13.7%13.7%

17.6%17.6%

3.1%3.1%

3.3%3.3%

5.1%5.1%

5.0%5.0%

Source: IRI

Net Result – A Tsunami In The Making:Net Result – A Tsunami In The Making:

Kroger – #1 At $44B (1999E):Kroger – #1 At $44B (1999E):

P.L. Brands now account for 25% of salesP.L. Brands now account for 25% of sales

Own P.L. manufacturing facilitiesOwn P.L. manufacturing facilities

Centralized P.L. purchasingCentralized P.L. purchasing

Three tier P.L. program – premium, traditional and valueThree tier P.L. program – premium, traditional and value

Just bought Fred Meyer where P.L. sales are 18% and Just bought Fred Meyer where P.L. sales are 18% and mainly in G.M. versus Foodmainly in G.M. versus Food

Kroger (cont’d)Kroger (cont’d)

If Kroger can get Fred Meyer P.L. food sales to 25% in If Kroger can get Fred Meyer P.L. food sales to 25% in three years, Kroger’s P.L. sales would be $10B and three years, Kroger’s P.L. sales would be $10B and incremental gross profits would be almost $100MM. This incremental gross profits would be almost $100MM. This means that Kroger’s:means that Kroger’s:

P.L. segment only would be larger than Heinz, Pillsbury P.L. segment only would be larger than Heinz, Pillsbury or Best Foodsor Best Foods

Profits would grow from 2.8 to 4.0 or 43%Profits would grow from 2.8 to 4.0 or 43%

Reality is that Kroger’s P.L. sales will grow to more like Reality is that Kroger’s P.L. sales will grow to more like 30% when Kroger shifts focus from reducing operating 30% when Kroger shifts focus from reducing operating expenses and assumes role of marketer.expenses and assumes role of marketer.

The Other Players:The Other Players:

Albertson’s-American – #2 at $36B:Albertson’s-American – #2 at $36B:

American got 30% of its profits and 20% of sales American got 30% of its profits and 20% of sales from just 8% of its P.L. SKUsfrom just 8% of its P.L. SKUs

This gives Albertson’s huge opportunity to grow This gives Albertson’s huge opportunity to grow its own P.L. sales from current levels (16.5%) to its own P.L. sales from current levels (16.5%) to American Store’s levels (20.2%)American Store’s levels (20.2%)

The Other Players:The Other Players:

Safeway – #3 at $27B:Safeway – #3 at $27B:

Wins Titanium Award for developing and Wins Titanium Award for developing and establishing a beautifully-packaged, quality “store establishing a beautifully-packaged, quality “store brand” with Safeway Select.brand” with Safeway Select.

Has the P.L. formula down pat: Is country leader Has the P.L. formula down pat: Is country leader with P.L. share at 25.5% of unit sales.with P.L. share at 25.5% of unit sales.

Can leverage Select brand name plus P.L. Can leverage Select brand name plus P.L. experience in Von’s, Dominick’s and Carr experience in Von’s, Dominick’s and Carr Gottstein.Gottstein.

The Other Players:The Other Players:

Ahold – #4 at $22B:Ahold – #4 at $22B:

Can leverage European P.L. expertise against Can leverage European P.L. expertise against Bi-Lo, Stop & Shop, Tops, Finast, Cleveland and Bi-Lo, Stop & Shop, Tops, Finast, Cleveland and Giant, Landover.Giant, Landover.

Procure on an international level.Procure on an international level.

37% P.L. penetration in Netherlands.37% P.L. penetration in Netherlands.

37% becomes the floor (not the objective) in the 37% becomes the floor (not the objective) in the U.S.U.S.

In Total, The Handwriting Would Appear To In Total, The Handwriting Would Appear To Be On The Wall:Be On The Wall:

All need to differentiate on basis other than price.All need to differentiate on basis other than price.

No evidence that consolidation ambitions have peaked.No evidence that consolidation ambitions have peaked.

All have size, resources and economies of scale to become own All have size, resources and economies of scale to become own marketers and take over role of “Category Captains” themselves.marketers and take over role of “Category Captains” themselves.

Key PlayersKey Players $ Sales (B)$ Sales (B) 19931993 19981998

Share of MarketShare of Market

KrogerKrogerWal-MartWal-MartAlbertson’sAlbertson’s

SafewaySafewayAholdAhold TotalsTotals

$44$4439393636

2727 2222

$168$168

6%6%0%0%3%3%

4%4% 2%2%15%15%

10%10%9%9%9%9%

7%7% 5%5%40%40%

% P.L. Share of Total (Units)% P.L. Share of Total (Units)

19931993 19981998

22.0%22.0%

14.0%14.0%17.4%*17.4%*20.5%20.5% 16.0%16.0%17.8%17.8%

24.5%24.5%

16.5%16.5%20.2%*20.2%*25.5%25.5%20.5%20.5%21.2%21.2%

* American

Surviving And Thriving As A P.L. Surviving And Thriving As A P.L. Manufacturer or SupplierManufacturer or Supplier

Threats To The Independent P.L. Threats To The Independent P.L. Manufacturing Community:Manufacturing Community:

1)1) Retailers developing own manufacturing capabilities as their P.L. Retailers developing own manufacturing capabilities as their P.L. grows and becomes cost effective to take in-house.grows and becomes cost effective to take in-house. KrogerKroger SafewaySafeway

2)2) National Brand manufacturers who have adopted P.L. supply as a National Brand manufacturers who have adopted P.L. supply as a contingency (or even survival) strategy:contingency (or even survival) strategy: Protect National Brand franchiseProtect National Brand franchise Cover operating costsCover operating costs Already producing to NBE standardsAlready producing to NBE standards Can leverage current I.T. and R&D to capture and maintain Can leverage current I.T. and R&D to capture and maintain

Private Label edgePrivate Label edge

3)3) “I Saw The Enemy And It Was Us!” – Lack of size, clout, “I Saw The Enemy And It Was Us!” – Lack of size, clout, resources and information technology to deal with mega giant’s resources and information technology to deal with mega giant’s demands in what, by definition, is a low margin business.demands in what, by definition, is a low margin business.

Given this environment, the key questions Given this environment, the key questions for private label suppliers is what are the for private label suppliers is what are the

meaningful ways one can differentiate meaningful ways one can differentiate oneself and create value for retailers over oneself and create value for retailers over

and above the obvious?and above the obvious?

Given this environment, the key questions Given this environment, the key questions for private label suppliers is what are the for private label suppliers is what are the

meaningful ways one can differentiate meaningful ways one can differentiate oneself and create value for retailers over oneself and create value for retailers over

and above the obvious?and above the obvious?

Let’s Start With The Obvious, Because This Let’s Start With The Obvious, Because This Is The Baseline:Is The Baseline:

Key Success Factors That Characterize Key Success Factors That Characterize Retailers’ “Best” Private Label SuppliersRetailers’ “Best” Private Label Suppliers

Very ImportantVery Important ImportantImportant Not ImportantNot Important

Consistent Product QualityConsistent Product Quality

Complete/Timely DeliveriesComplete/Timely Deliveries

Promotional SupportPromotional Support

Flexibility On PriceFlexibility On Price

Innovative Product IdeasInnovative Product Ideas

Below Average Product CostsBelow Average Product Costs

In-Store Sales ServiceIn-Store Sales Service

100%100% 0%0% 0%0%

98%98% 2%2% 0%0%

52%52% 36%36% 11%11%

49%49% 51%51% 0%0%

49%49% 49%49% 2%2%

44%44% 42%42% 14%14%

14%14% 44%44% 42%42%

Source: PLMA, “Blueprint For Growth” Current Salmon Associates, 1998Based On Responses From 45 Leading Retailers

How Independent Private Label Manufacturers Stack-Up Against National How Independent Private Label Manufacturers Stack-Up Against National Brand Manufacturers In Meeting These Needs Suggests That “Pricing Brand Manufacturers In Meeting These Needs Suggests That “Pricing Flexibility” Is Currently The Independents’ Strongest Selling Point:Flexibility” Is Currently The Independents’ Strongest Selling Point:

Which Type of Supplier Is Better Equipped Which Type of Supplier Is Better Equipped In Regard To The Following Factors?In Regard To The Following Factors?

Performance MeasuresPerformance MeasuresPrivate LabelPrivate Label

Suppliers SuppliersNational Brand National Brand

SuppliersSuppliers

Retail MarginsRetail Margins 96%96% 4%4%Pricing FlexibilityPricing Flexibility 84%84% 16%16%Ability To Work WithAbility To Work With 69%69% 31%31%Product QualityProduct Quality 39%39% 61%61%Consistent DeliveryConsistent Delivery 34%34% 66%66%Promotional SupportPromotional Support 22%22% 78%78%PackagingPackaging 21%21% 79%79%Equipment & Technology (Plant/Machinery)Equipment & Technology (Plant/Machinery) 20%20% 80%80%Category ManagementCategory Management 9%9% 91%91%EDIEDI 9%9% 91%91%Product InnovationProduct Innovation 2%2% 98%98%ECRECR 0%0% 100%100%

Source:

With Regard To Price:With Regard To Price:

Low price is NOT a viable or sustainable strategy for Low price is NOT a viable or sustainable strategy for P.L. manufacturers long-term:P.L. manufacturers long-term:

Anyone with deep pockets can emulate low prices Anyone with deep pockets can emulate low prices and outlast youand outlast you

Perrigo and Paragon are not the lowest cost Perrigo and Paragon are not the lowest cost suppliers in their categories and did not build their suppliers in their categories and did not build their businesses slowly on pricebusinesses slowly on price

With Regard To Price:With Regard To Price:

Price IS a major component of the P.L. sales mix but Price IS a major component of the P.L. sales mix but must be balanced with other factors to provide you must be balanced with other factors to provide you with a signature reason for being – for example:with a signature reason for being – for example:

Identifying new product opportunities and Identifying new product opportunities and developing new products to meet themdeveloping new products to meet them

Consistent qualityConsistent quality

Consistent deliveryConsistent delivery

Promotion supportPromotion support

All of the aboveAll of the above

It Is Obviously Impossible In A General Meeting Like This To Address Each It Is Obviously Impossible In A General Meeting Like This To Address Each Supplier’s Particular Issues, But Here Are Some Guidelines Which Will Help Supplier’s Particular Issues, But Here Are Some Guidelines Which Will Help You Survive and Thrive In The New Environment:You Survive and Thrive In The New Environment:

1.1. Do not try to be all things to all retailers:Do not try to be all things to all retailers:

Different retailers have different definitions of Different retailers have different definitions of “value-added” and even these may vary in degree.“value-added” and even these may vary in degree.

Know how each retailer defines value-added and Know how each retailer defines value-added and target those retailers whose definition most closely target those retailers whose definition most closely approximates your core competencies.approximates your core competencies.

Guidelines, (cont’d)Guidelines, (cont’d)

2.2. Be able to say who you are what you stand for in one Be able to say who you are what you stand for in one (short) sentence:(short) sentence:

For example:For example:

““One-stop shopping for high quality store brand One-stop shopping for high quality store brand products”products”

Do one thing right and build your reputation on itDo one thing right and build your reputation on it

Guidelines, (cont’d)Guidelines, (cont’d)

3.3. Understand what you are good at and be honest with Understand what you are good at and be honest with yourselves about what you are not good at:yourselves about what you are not good at:

Do not expand into areas outside of your core Do not expand into areas outside of your core competencies as this will only dilute your image competencies as this will only dilute your image and drain your resourcesand drain your resources

Guidelines, (cont’d)Guidelines, (cont’d)

4.4. Know your costs:Know your costs:

If you do not yet have an activity-based costing If you do not yet have an activity-based costing (ABC) system, get one(ABC) system, get one

As chains get bigger, P.L. margins As chains get bigger, P.L. margins will go downwill go down

Success or failure may be a matter of pennies – as Success or failure may be a matter of pennies – as it has been for years in the supermarket businessit has been for years in the supermarket business

Guidelines, (cont’d)Guidelines, (cont’d)

5.5. Avoid making promises you cannot fulfill:Avoid making promises you cannot fulfill:

““If you take us on, we’ll put one person on-site to If you take us on, we’ll put one person on-site to manage the business.”manage the business.”

““We can process and deliver within 7 days.”We can process and deliver within 7 days.”

Guidelines, (cont’d)Guidelines, (cont’d)

6.6. Hire the best people you can afford but stay lean:Hire the best people you can afford but stay lean:

Particularly important with those who represent you Particularly important with those who represent you on the front lineon the front line

Leverage big company training and expertiseLeverage big company training and expertise

Guidelines, (cont’d)Guidelines, (cont’d)

7.7. Do not build in unnecessary quality:Do not build in unnecessary quality:

Once NCE is past, you are back in a price gameOnce NCE is past, you are back in a price game

Better to devote the funds to new product Better to devote the funds to new product innovation or operational improvementsinnovation or operational improvements

Guidelines, (cont’d)Guidelines, (cont’d)

8.8. Dig for the details that will make a difference and set Dig for the details that will make a difference and set you apart. For example:you apart. For example:

Most supermarkets are leaving millions on the table Most supermarkets are leaving millions on the table because the price gap between P.L.s and national because the price gap between P.L.s and national brands is too big vs. consumer expectationsbrands is too big vs. consumer expectations

All of this is carefully detailed and publicly available All of this is carefully detailed and publicly available in a nifty little report from Wharton. Using in a nifty little report from Wharton. Using information like this to help your key accounts information like this to help your key accounts increase profits is far more powerful than cutting increase profits is far more powerful than cutting your costs another 10¢.your costs another 10¢.

Death Strokes:Death Strokes:

In the future, if your answer to, “why should we buy from In the future, if your answer to, “why should we buy from you?”, is: “Because we are the lowest cost brand” – you you?”, is: “Because we are the lowest cost brand” – you are committing suicide.are committing suicide.

““We’re just as good as the supplier you are using” – We’re just as good as the supplier you are using” – provides no real point of differentiation (and pisses off the provides no real point of differentiation (and pisses off the buyer).buyer).

““I’ll match anybody’s price” – indicates that the supplier I’ll match anybody’s price” – indicates that the supplier does not understand his own costs and is potentially does not understand his own costs and is potentially unreliable as a long-term source.unreliable as a long-term source.

““Just tell me what you want and I’ll make it for you” – Just tell me what you want and I’ll make it for you” – conveys the message that you are not much more than a conveys the message that you are not much more than a street walker.street walker.

Net:Net:

Pick your ground and plan your flag – stand for something that Pick your ground and plan your flag – stand for something that leverages your core competencies and be able to communicate leverages your core competencies and be able to communicate this simply and effectively.this simply and effectively.

Develop a strategic approach to expanding sales and profits:Develop a strategic approach to expanding sales and profits:

A “strategy” is a course of action build on an understanding A “strategy” is a course of action build on an understanding of one’s inherent or indigenous strengths which results in a of one’s inherent or indigenous strengths which results in a predictable growth curve predictable growth curve andand which forces your competitors which forces your competitors to define their own strategies by what you are doing.to define their own strategies by what you are doing.

Wal-Mart’s “always low prices” strategy has forced Wal-Mart’s “always low prices” strategy has forced supermarkets to react to Wal-Mart for the past 15 years – supermarkets to react to Wal-Mart for the past 15 years – mostly without success.mostly without success.

Net:Net:

If you have not done so already, reengineer your organization to If you have not done so already, reengineer your organization to develop an answer to the following question:develop an answer to the following question:

““What are you going to do to help us sell more product, not What are you going to do to help us sell more product, not just more of your products?”just more of your products?”

Thank You,Thank You,It Has Truly Been An HonorIt Has Truly Been An Honor